Basically, print product is zero-rated for VAT (not ’exempt’ – more on that later) which means that publishers are not collecting tax on copy sales and subscriptions. Digital product is VATable at 20% (for goods serviced from the UK) so any app sales, paywall charges, online subscriptions etc should have VAT applied.

(There is discussion among publishers as to whether digital facsimile editions incur VAT. Zinio add the tax onto its customer charges, others don’t. My belief is that these sales are VATable, but you’d be well advised to try to find a definitive answer.)

As Patrick points out, the big issue comes over the bundling of print and digital subs – basically, the digital part of the sub incurs VAT, which you must specify and

pass onto HMRC. If you have established a price for the digital element elsewhere (i.e. if it’s possible to buy the digital element as a standalone) then that sets the benchmark for the VAT charge regardless of what the actual ’bundled’ price is. For example, if a customer could take your print subscription for £100 or a digital sub for £40 then even if you bundled together the two elements – ’subscribe to the print edition for £100 and get digital access free’ – then HMRC would start from the position that you owe them the VAT on the £40 digital ‘value’ and it would be up to you to justify why you shouldn’t. Magazines and papers that have bundled in free digital access with print subs could therefore face a hefty bill. (And, very importantly, the VAT charge would be applied to the whole subscriber base, not just those people who had used their ’free’ digital access.)

[A similar situation applies to free gifts with subscriptions; if you offer a free gift as a subs loader then HMRC wants the VAT on the value of those goods. Even if the gifts have been supplied free by the manufacturer or a PR, HMRC can pursue you for the VAT on the retail price. I got caught like this when we gave a free bottle of whisky to Spectator subscribers. We’d traded 400 bottles of single malt for promotional space so no money had changed hands, but the VAT man charged us the tax on the retail value of the bottles. Although the whisky was free to us and free to the customer, the tax man wasn’t prepared to forgo the VAT he would have got – we were adjudged to have added VATable value to the (non-VATable) subscription.]

That’s the detail, but the bigger picture is more omimous. The bonus that publishers get from being zero-rated is that although they don’t have to add VAT onto their print products, they can claim the VAT back on goods that they buy. This means that many publishers are getting refunds from HMRC each quarter because the value of the VAT they pay for goods in (which is almost everything except staff costs) is more than the VAT they’re adding to the goods and services they’re providing.

I had a twitter conversation with Patrick about this where I called this situation a ’subsidy’, but actually I was looking at it the wrong way round. All businesses claim back the VAT they are charged; the advantage that publishers have is that they don’t have to add VAT to the cost of their products. This is a marketing or sales bonus in that it keeps down the price that the customer pays; I don’t think that there are any publishers who still claim that the cover or subscription price doesn’t affect sales volumes.

If VAT were to be added to print products, then publishers would either have to take a hit on revenues, or increase prices and see sales drop further. Future has just released its financial report for 2011 and records £80 million in circulation sales revenue (this does include the US, but let’s gloss over that). If VAT applied at 20% then £16 million would have to be found, either from revenues or from customers for this sales value. Even at a VAT rate of just 5% HMRC would be expecting a cheque for £4 million.

We can only guess at the price elasticity, but even at a low level it would have a significant impact. Let’s say a 5% increase in price leads to a 2% drop in sales (what’s your price elasticity model?); Future sell 2.9 million magazines a month, so a 5% VAT rate could mean they would sell 700,000 fewer copies a year. Having to pass on a 20% VAT rate would basically wipe out a month’s sales. (I’m using Future as an example simply because as a PLC their figures are freely available.)

But surely none of this is going to happen? Would any government dare add VAT to printed products?

The justification for not doing it has always rested on an argument for a free press plus the realpolitik of the government taking on the newspaper industry. But both of those arguments are weakening – a free press, yes, but a) why free print and not free digital?, and b) democracy may be served by having a vibrant press holding government to account, but tax breaks for Heat and Top Gear, what’s the rationale there? And the ’phone hacking scandal and the Leveson inquiry has already removed the swagger of the press and eroded its power over politicians; a Chancellor looking for new sources of revenue could have no more opportune time.

The UK is not unique in Europe in zero-rating publications, but it is in a very small minority and there are even fewer countries that zero-rate periodicals as distinct from newspapers [this slightly out-of-date table shows the rates across the EU]. If you’re a publisher you not only have to think specifically about the VAT you charge for your digital editions, you should also be thinking very hard about how your business would deal with having to add VAT on every magazine and subscription you sold.[As an arse-covering footnote, I need to point out here that I’m not a tax expert so you should seek professional advice about your VAT position etc etc.]

August 2016 update: All the above is probably now hopeless out of date, so can I direct you to this piece on the Dovetail Services site: VAT in the EU